Stock Investing 101
Covering the day's decline and scads more

by Jeff Fischer (TMFJeff@aol.com)

Alexandria, VA (Feb. 4, 1999) -- Stock Investing 101.

Q. Why do stocks decline, and why did they fall today?

A. The most basic (and most true) answer is that stocks decline when there are more sellers than buyers. The stock market is not an auction market (as everyone in this industry, including people on the Fool, like to say), but it's a market of buyers and sellers. (It isn't an auction market in this way: how often have you seen an item at an auction bid up, and then bid back down?) Instead, people known as market makers match supply-side demand with sell-side demand for each stock. They do this in order to find a fair price at which both parties will make transactions. It's a balancing act.

Today, many more people were selling rather than buying, hence the price of most stocks naturally declined. On a day like today, stocks must decline in order to find buyers for the shares that are for sale. (If a stock rose today, there were more buyers than sellers for it.) So, your favorite businesses didn't falter. Long term, a company's stock tracks its business performance, yes; short term, a stock price tracks the phases of the moon with more accuracy at times than it does a company's daily value.

Q: So why were people selling today?

A: I've seen several excuses, none of which matter. Spending time figuring out why stocks fell on this particular day (when the day is over now anyway) is a waste of time. If you really want a reason, though, how is this:

The Wise media is blaming the non-action of the Federal Reserve yesterday for putting investors at a completely unexpected impasse. All of a sudden, investors were standing around today looking for something to act on. Luckily (sarcasm intended), economic figures are released almost every day in this country, and strong figures this morning allowed market watchers to get nervous. What were they nervous about? Well, they were nervous that interest rates might need to rise. If the US economy is deemed to be too strong, Greenspan could eventually move interest rates higher in order to negate inflation.

Got that?

Therefore -- through questionable logic -- investors began to worry that the Fed might indicate a change of stance regarding interest rates in the official minutes from yesterday's meeting that were to be published this afternoon. This morning rumors began to circulate that the minutes from the meeting would indeed hint at a coming interest rate hike.

The minutes were released this afternoon. They revealed nothing. Nothing at all. Greenspan didn't drop any hints indicating that the Fed is now leaning towards higher interest rates in the future. No "wink winks" were inserted in the minutes. No smiley faces. No nudges or anything. Therefore, stocks rebounded. But then they fell again because everyone decided to be nervous anyway. Why? Because the minutes might not have any clues, but the Fed might still be leaning towards higher interest rates.

Let's pause for a moment. Breathe out. OK. Let's continue.

Can you believe that all of this stuff is actually what drove stocks down today, according to the Wise reports? Isn't it hard to believe? Yet it's true. All of the boys and girls of Wall Street were waiting to read between the lines of the minutes from yesterday's meeting in an attempt to guess what the Fed might do weeks or months from now. Amazing. No wonder the stock market calms down at lunchtime every day: all of the traders and market-watching Wise go out for recess where they play kick ball, chase each other in circles, climb jungle gyms and sometimes catch butterflies.

Q. What is the stock market's purpose?

A. The stock market was created as a fundraising vehicle for companies. Almost all companies need financing at some point, and the stock market was begun as a ready source of significant capital. And capital begets more capital, which creates wealth for all involved. The stock market was not created so that 26-year-old voluntarily unemployed MBA graduates could hang out in their apartments and try to trade stocks all day until finally needing to get a real job (and pay off their losses).

They were created so companies could raise money for expansion. The companies then provide more services to the public, and the public benefits. The public can also benefit by becoming part-owners in the companies. (So in essence it's a full circle, and everyone can win.) Over history, the most benefit has always been derived by buying and holding good firms for the long term. This doesn't change just because technology advances.

The telephone caused nothing but damage during the 1929 crash. The Internet makes investing easier to do, more accessible, easier to understand, and even more fun and completely hands-on; but it doesn't change the fact that buying and holding is the best route to go, period. And it doesn't change what the stock market is meant for: a respectable place for companies to raise capital, and for investors to participate in the long-term growth of the world's economies and its leading companies.

Q. OK. So, in the morning when one turns on CNBC, why does one feel as if they've just stepped into a Las Vegas gambling pit?

A. Excitement. Glitz. Perceived risk. It's all about marketing. Make the show dramatic by the minute and you're certain to have eyes riveted to it. Tick down, tick up, tick sideways: next show an advertisement and make money. Seriously, that's journalism and reporting: by the minute, on the minute. It never makes for a successful investment career. Successful investors don't watch that show or other daily shows. There's no need.

By the way, the only show that David Gardner watches regularly -- or used to -- that I know of is Star Trek. (He should get together with Bezos sometime.) Meanwhile, Tom likes to watch the game show channel on cable. Or he used to. (Star Trek, incidentally, is not necessary for successful investing either.)

Summary of the Day That Was. The Rule Breaker fell on par with the Nasdaq, which dropped 3.3% on the aforementioned concerns and probably due to the fact that it soared during all of January (and December). International Paper (NYSE: IP) and DuPont (NYSE: DD) were our only risers. International Paper received approval for its $6.6 billion acquisition of Union Camp Corp (NYSE: UCC).

We'll make our Foolish Four switch on Monday, February 22. Mark your Palm Pilots. If you don't have a Palm Pilot, 3Com (Nasdaq: COMS) cut prices 20% today and they're sold at Amazon.com (Nasdaq: AMZN).

Final thought: Why doesn't Amazon sell subscriptions to magazines and/or newspapers? I don't know the dynamics of the business, but it'd be very convenient to be able to renew or begin a subscription online. Amazon wouldn't need to carry any inventory, obviously, and it could make arrangements to get a percentage of sales, one would think.

Catch Tom and David on their ongoing country-wide book tour for the best-selling new book, Rule Breakers, Rule Makers. Check out the dates and places of the tour and be there to say hello, chat, and have your book signed (or your forehead, if you don't have or want a Fool book). Finally, for more to read tonight, Drip Port just began its company-by-company look at oil corporations for a possible investment.

Fool on!

What's up with Harry Jones today? Check out his portfolio now.

02/04/99 Close

Stock  Change    Bid 
AMZN  -7 3/4  118.00
AMGN  -1 3/4  125.94
AOL   -4 11/16 168.75
T     -3 3/4   91.25
ATHM  -4 3/4  108.00
DJT   -  1/4    4.25
DD    +1 7/8   54.88
XON   -  9/16  69.81
IP    +2 5/8   44.19
IOM   -  1/16   7.13
LU    -6 5/8  103.13
SBUX  -1       50.94
TDFX  -  1/4   12.06
                   Day   Month    Year  History  Annualized 
      R-BREAKER  -3.21%  -2.27%   9.62%  1000.29%   70.37%
        S&P:     -1.85%  -2.43%   1.89%  185.92%   26.29%
        NASDAQ:  -3.34%  -3.82%   9.91%  234.65%   30.78%
 Note:  Yearly, historical and annualized returns for the 
S&P include dividends

    Rec'd    #  Security     In At       Now      Change
   8/5/94  1100 AmOnline       1.82    168.75    9183.71%
   9/9/97  1320 Amazon.com     6.58    118.00    1693.52%
  5/17/95  1960 Iomega Cor     1.28      7.13     456.46%
  10/1/96    84 LucentTech    23.81    103.13     333.15%
  8/12/96   130 AT&T          39.58     91.25     130.56%
  12/4/98   450 @Home Corp    56.08    108.00      92.58%
  4/30/97 -1170*Trump*         8.47      4.25      49.82%
 12/16/98   290 Amgen         85.75    125.94      46.87%
  2/20/98   200 Exxon         64.09     69.81       8.93%
  2/20/98   270 Int'l Pape    47.69     44.19      -7.35%
  2/20/98   215 DuPont        59.83     54.88      -8.29%
   7/2/98   235 Starbucks     55.91     50.94      -8.89%
   1/8/98   425 3Dfx          25.67     12.06     -53.00%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  1100 AmOnline    1999.47 185625.00  $183625.53
   9/9/97  1320 Amazon.com  8684.60 155760.00  $147075.40
  12/4/98   450 @Home Corp 25236.13  48600.00   $23363.87
 12/16/98   290 Amgen      24867.50  36521.88   $11654.38
  5/17/95  1960 Iomega Cor  2509.60  13965.00   $11455.40
  2/20/98   200 Exxon      12818.00  13962.50    $1144.50
   7/2/98   235 Starbucks  13138.63  11970.31   -$1168.31
  2/20/98   270 Int'l Pape 12876.75  11930.63    -$946.13
  8/12/96   130 AT&T        5145.11  11862.50    $6717.39
  2/20/98   215 DuPont     12864.25  11798.13   -$1066.13
  10/1/96    84 LucentTech  1999.88   8662.50    $6662.62
   1/8/98   425 3Dfx       10908.63   5126.56   -$5782.06
  4/30/97 -1170*Trump*     -9908.50  -4972.50    $4936.00

                              CASH  $39332.55
                             TOTAL $550145.05


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